Examining Muddy Waters’ Track Record

Singapore commodities firm Olam International Ltd. came out fighting on Wednesday with a detailed rebuttal against allegations from short-seller Muddy Waters, questioning the company’s accounting practices and solvency.

Muddy Waters raised eyebrows with its latest target because it has traditionally picked on Chinese companies listed in North America. Olam also counts Singaporean state investment fund Temasek Holdings Pte Ltd. as a large shareholder.

Olam’s shares have suffered since Muddy Waters founder Carson Block raised questions about the company at a conference in London last week. A look back at Muddy Waters’ past targets shows that while some have been all but totally decimated by the accusations, others have fared better, at times finding new leases on life as private companies.

A paper manufacturer and distributor based in Hebei province and listed on NYSE Euronext’s American Stock Exchange, Orient Paper was Muddy Waters’ first target. A report on the company was issued in June 2010. The report said Orient Paper had overstated its 2009 revenue by about 40 times, and that it overvalued its assets by at least 10 times. Orient Paper commissioned an independent investigation into the allegations, led by its audit committee, and rebutted all of Muddy Waters’ allegations. A spokeswoman later told the WSJ the company’s business wasn’t hurt in the long run, but its stock price is still suffering. The stock is trading at $1.97, down from above $8 before Muddy Waters’ report was published.

Muddy Waters published a report on the Chinese equipment maker in November 2010, alleging that the company overinflated its revenue and that many of its customer relationships don’t exist. It also said RINO was “draining cash from the company” for personal uses. RINO’s chief executive acknowledged later to the board and the company’s auditor that RINO “did not in fact enter into two of the six” customer contracts that Muddy Waters said were false, and that there “might be problems” with 20% to 40% of the company’s other contracts. The Securities and Exchange Commission suspended its trading in April 2011 at $1.71 for failing to disclose to shareholders that investigators looking into fraud allegations at RINO had resigned.

China Media Express Holdings

Muddy Waters released a report on the advertising firm, which sells ad space on video screens installed in buses, in February 2011. So did another short-seller, Citron Research; both short sellers said they acted independently of each other. Muddy Waters alleged that MediaExpress had fewer than half the 27,200 buses it said it had in its network, a charge the company denied. The company counted former American International Group Inc. head Maurice “Hank” Greenberg as an investor. His investment vehicle later sued MediaExpress. MediaExpress’s auditor, Deloitte Touche Tohmatsu, resigned in March, and the company was suspended from trading in March. In May, Nasdaq delisted its shares, having dropped to $1.70 from about $23 in January.

Muddy Waters claimed in a report in April 2011 that the water-treatment equipment supplier had forged its audit report, and that it severely overstated its revenues. Trading in the company’s shares were halted that month, after four of the six independent members of its board resigned, citing dissatisfaction with company’s management in the independent review of the company’s internal controls. The New York Stock Exchange delisted its depositary shares in June this year, and said the company was no longer suitable to be listed after it failed to file on a time basis its annual report with the SEC.

Sino-Forest Corp.

This is the one that put Muddy Waters on the map, with a report released in June 2011. Muddy Waters took aim at the Toronto-listed timber company, saying it grossly exaggerated the value of its plantation assets. Sino-Forest denied the allegations. Canadian regulators imposed a cease trade order on Sino-Forest in August last year, alleging the company may have “misrepresented” some of its timber holdings. Sino-Forest filed for creditor protection in March this year, after the Toronto Stock Exchange said it would delist the common shares of the company for failure to meet listing requirements. The delisting came after Ernst & Young LLP resigned as Sino-Forest’s auditor. In July, Sino-Forest said it had failed to find a buyer.

There was a marked difference in Muddy Waters’ approach to this company compared with previous targets. Rather than releasing a full-blown report, Muddy Waters merely published an open letter to the company’s chairman in June 2011, based on public filings. Mr. Block said in a TV interview he wasn’t a “ninja assassin” trying to take the stock down, but simply tried to raise questions regarding the company’s accounting and management changes. It sent the stock down more than 30%, but Spreadtrum’s stock price has since recovered, trading higher than before Muddy Waters published the report.

Muddy Waters issued a report on another advertising firm in November last year, accusing Focus Media of overstating the number of liquid-crystal-display screens it uses to display ads in China, and overpaying for acquisitions to hide losses. Focus Media’s shares plunged, but recovered somewhat after the report was released, as the company tried to restore confidence in the company by announcing shortly after that its top executive would purchase shares in a block trade, and paid out a quarterly dividend in January. Focus Media denied the accusations. Focus Media is now in the process of being taken private, after a consortium including its chief executive and chairman, and private-equity firms including Carlyle Group LP and FountainVest Partners, offered $27 a share for the company, valuing it at roughly $3.66 billion.

Muddy Waters released a report on the Nasdaq-listed maker of metallic wire in April, but it didn’t have quite the same effect on the company’s stock as in previous cases. After dropping 11%, Fushi Copperweld’s share price quickly bounced back the next day. Like Spreadtrum, Muddy Waters also didn’t publish a detailed report on the company, but released a video in which founder Carson Block discussed the company. Fushi Copperweld agreed to a $364 million offer to be taken private by its chairman and co-chief executive, as well as private-equity firm Abax Global Capital in June.

In July, Muddy Waters claimed in a report that the company, the largest provider of private educational services in China, that not all of the company’s 664 schools were self-operated, but were operated by franchisees, which New Oriental consolidated into its earnings as its own. New Oriental maintained that all of its schools and learning centers belonged to the company. The report sent New Oriental’s shares down 37% immediately, and though the shares quickly climbed back up, they haven’t returned to the level before which the report was published. The company announced a stock purchase in July and agreed not to sell any of its shares for six months.

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